Property Valuation, 3rd Edition

Chapter 14Valuation Variance, Risk and Optionality

14.1 Introduction

This final chapter discusses ways that valuations, and valuation reports, might be improved by considering how the valuation figure might vary. It begins with a review of research into the twin issues of valuation accuracy and valuation variance. Valuation accuracy refers to the difference between a valuation of a property and its subsequent sale price, whereas valuation variance is the difference between one valuer's valuation and another's. Both of these concepts are ways of measuring the performance of valuers. Indeed, they have become central to valuation negligence claims. Often, the legal profession refers to a ‘margin of error’ within which valuations would be expected to fall and outside of which might indicate cause for concern. A key question for the legal profession is margin of error around what? The eventual sale price (valuation accuracy) or between valuations (valuation variance).

The chapter then considers ways of analysing risk associated with a valuation. From the outset, it is important to distinguish valuation uncertainty from risk. The purpose for which a valuation is commissioned may involve a lot of risk, a development scheme for example. Valuation uncertainty will be often, but not always, closely related to the level of risk. However, valuation uncertainty could be very low where several very good direct comparable transactions are available as comparables, even where the actual risk ...